As Investors Grow Concerned About China's Tech Crackdown, India Is Seeing A Surge In Unicorns

The last week was incredible in terms of the growth of India's technology companies, as a record round of funding moved focus to the world's second-largest market at a time when investors were concerned about China's crackdown on tech firms.

While the food delivery app Zomato with funding from Morgan Stanley, Tiger Global and Fidelity Investments, became the country's first unicorn to go public, raising $1.3 billion, Paytm submitted a draught prospectus for a $2.2 billion IPO, which might be India's largest and Flipkart Online Services Pvt received $3.6 billion at a $38 billion valuation.

According to Hans Tung, the Silicon Valley-based managing partner of GGV Capital, for the past several years, Indian entrepreneurs have been quietly establishing start-ups, the country's internet infrastructure has dramatically improved, and there is a strong global desire for IT stocks. Hans said that "investors are beginning to see the huge upside and they expect India to be a China," reported the South China Morning Post.

In contrast to China, where online usage is far more advanced, many of India's 625 million internet users are getting started to experience the world of video streaming, social networking, and e-commerce. Since e-commerce accounts for less than 3 per cent of retail transactions, the possibilities in online buying are extremely appealing. Even a London-based data and analytics firm GlobalData has predicted that India's e-commerce market will reach $120 billion by 2025.

But in China, the authorities are reigning in its internet companies, slashing market values by over $800 billion since February's peak and decreasing the net wealth of its most prominent entrepreneurs by billions. The Cyberspace Administration Of China abruptly removed Didi Global from app stores earlier this month. This move came months after regulators pushed Chinese business mogul Jack Ma's Ant Group to cancel a spectacular IPO at the last minute.

The crackdown is expected to continue as officials attempt to rein in tech corporations' dominance. It is vital to remember that Chinese tech businesses operate in a country where the government is becoming increasingly dictatorial, demanding absolute fealty from the private sector. The more important fact is that under cover of antitrust, China is cementing the Communist Party's monopoly of power, with private businesses losing what little independence they have left and becoming a kind of additional arm of the state.

Apart from all these, many tech companies funded by Western venture capital firms and listed in New York have raised concerns in China that they could become economic pawns if bilateral relations deteriorate between Beijing and Washington. China has stated that domestic tech firms will be subjected to a cybersecurity audit before they can offer their shares overseas, thus putting an end to most IPO aspirations. As per the New York Times, the message is quite clear—Beijing wants politically astute individuals in the commercial sector who will firmly listen to and follow the orders of the Communist party while contributing more to the party's longevity and assisting to the restoration of China's greatness.

The Opportunity

Nilesh Shah, who is the group president and managing director of Kotak Mahindra Asset Management in Mumbai, India, said that the global investors who have lost money in Chinese tech companies might be interested in investing in Indian IT enterprises. According to him, the successful listing of a few loss-making start-ups could lead to the re-rating of many established companies, boosting the market.

According to statistics from research firm CB Insights, India had a record $6.3 billion in funding and deals for technological start-ups in the second quarter, while funding to Chinese companies fell 18 per cent from a high of $27.7 billion in the fourth quarter of 2020. One of the key e-commerce players in India, Flipkart is among a slew of companies planning to enter public markets in the next 24 months, including insurance marketplace Policybazaar's parent company ETechAces Marketing & Consulting Pvt, logistics provider Delhivery Pvt and ANI Technologies Pvt's Ola transportation service. The IPOs will allow retail investors to purchase shares in start-ups that were previously exclusively available to global private investors.

In the private markets, India has been churning out start-ups worth $1 billion or more at an unprecedented rate in recent months. In April, half a dozen companies became unicorns within four days, and the time between fundraising rounds for many start-ups has shrunk to weeks.

According to the South China Morning Post, research published this year by Credit Suisse Group AG has claimed that India has over 100 unicorns with a combined market worth of $240 billion, ranging from e-commerce and fintech to education, logistics, as well as food delivery. Krishnan Ganesh, a serial entrepreneur who now promotes companies that have received funding from firms such as Sequoia Capital, Lightspeed Venture Partners and Qualcomm Ventures said: "Global investors see the potential upside in India's huge, underpenetrated market and capital flows have multiplied 10 times".

But the Indo-American Chamber of Commerce (IACC) expressed concern about the planned revisions to the Consumer Protection (E-Commerce) Rules, 2020, which are intended to protect consumer interests, stating that it may exacerbate the impact of a plethora of restrictions on the e-commerce sector and it would increase compliance obligations, potentially stifling the sector's growth.

Apart from that, some analysts believe that the stock market is on the verge of bursting and that many firm valuations are significantly higher than their fundamentals. They have warned that individual investors in new-age companies that have yet to earn profits would need to consider aspects such as investment in creating a loyal client base as the start-ups scale-up, in addition to classic value measures like earnings per share (EPS) and price-to-earnings (P/E).

However, tech tycoon Nandan Nilekani, who is the chairman of outsourcer Infosys Ltd said that "India's consumer internet companies have come of age. When these new start-ups convert their pole position to earnings and cash flow, their future is assured".